Al “Scarface” Capone and the financial status audit

September 03, 2015 by Eric Linden
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What do “Scarface” Capone and a tax audit have to do with each other? They actually do have a bit of a connection. Scarface went to prison for TAX EVASION! Yup, not murder. Not racketeering. (Not sure if that was even on the books then.) Not gambling. You would never guess that charge and conviction for someone with as impressive of a criminal resume as you can find in the 20th century. But alas, the vicious gangster was sent to prison for eleven years for a tax crime.

The Federal government must get creative sometimes when attempting to bring down elusive "Dapper Dons", and Capone was no exception. Scarface was not a stupid man, even though he never even completed the sixth grade! He was masterful in removing himself from any connection to violence which, as you can imagine, was quite frustrating for the FBI.

Enter the IRS. Maybe they would be able find something? Mr. Capone made lots and lots of money. The IRS knew this, of course, but did he report it? And this brings us to the IRS audit topic many do not know exists. I sure did not until I began my time here at TaxAudit.com. It is called a Financial Status Audit.

Your standard of living could trigger a tax audit. An auditor could be tipped off from a television report or something of that nature that clearly indicates a life of luxury. The auditor then can access public data to review spending habits and wealth patterns to reveal possibly unreported income. Kind of scary, actually. However, in 1998, an Act of Congress limited the IRS’s power in this realm stating that they need a “reasonable indication” of probable tax evasion. This does seem a bit ambiguous as this statute does not properly define “reasonable indication.”

I asked Jean Lee Scherkey from TaxAudit.com’s education and research team to provide a little insight, and here’s what she said:

“If after reviewing the taxpayer’s basic tax information it appears to the IRS the taxpayer does not have enough income to cover living expenses, the IRS examiner is required to delve further. The examiner may conduct various interviews, reconcile books and records and do a complete bank account analysis.  If, at this time, the taxpayer is still unable to explain or show how living expenses were paid given the amount of income on the return, the IRS has the authority to use what is called an “Indirect Method” to prove a taxpayer’s true financial status. In fact, one of the five “Formal Indirect Methods” the IRS still uses to assess unreported income were developed when the IRS was investigating Mr. Capone in 1931.”

That’s interesting, and, as she said, probably a little bit scary for some people. So there you have it. It is probably best to stay off MTV Cribs if you are not paying your taxes.

We are not purporting that Capone was brought down because of a simple IRS audit. There is much more to this investigation and subsequent conviction, but it does bring up a great illustration on how “living large,” as the hip hop community likes to rap about, can be dangerous for any taxpayer who isn’t reporting all of their income. More recent cases come to mind. Singer/songwriter Willie Nelson and actor Wesley Snipes have had serious tax trouble and it, most likely, did not help they were probably not living in an apartment while driving a Hyundai.

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